1. The petitioner herein was a partner in the firm of M/s. Tarapore and Company consisting of himself and one C. S. Loganathan. The said C. S. Loganathan died on May 11, 1971, and, consequently, the said firm stood dissolved. Subsequently, the petitioner has been carrying on business under the same name and style. After the death of the said Loganathan a settlement is said to have been arrived at bet-ween his legal representatives and the petitioner, and the assets and liabilities of the said firm had been divided in terms of the said settlement.
2. On March 5, 1973, the petitioner had been served with a notice purporting to be under Section 182(4) of the I.T. Act calling upon M/s. Tarapore and Company, the new concern, to pay a sum of Rs. 1,49,287 stated to be 30% of the share income of C. S. Loganathan for the assessment years 1962-63 to 1965-66 and 1967-68, Subsequently, an order under Section 154 dated March 30, 1976, has been passed by the first respondent whereby the original notice dated March 5, 1973, issued under Section 182(4) was modified and an additional demand for Rs. 8,49,353 in addition to the demand of Rs. 1,49,287 was made. The order dated March 30, 1976, passed under Section 154 further stated that the share income of the partner had undergone a change as a result of appeals, etc., and 30% of the share income as the basis of the revised figures worked out to Rs. 9,98,640.
3. The petitioner filed a revision application under Section 264 of the Act before the second respondent for revising the order passed by the first respondent under Section 182(4) contending that the said demand for Rs. 9,98,640 is not tenable in law, for the following reasons : (1) The first respondent has no jurisdiction to invoke the provisions of Section 182(4) for recovering the tax due by the deceased partner of the erstwhile firm from the petitioner ; (2) the provisions of Section 182(4) are not applicable since the firm had already been dissolved; and (3) that Section 182(4) read with Section 189(3) renders the section inapplicable to any period prior to October 1, 1975.
4. The second respondent by his order dated July 22, 19/7, rejected the revision petition. The validity of the said order of the second respondent has been challenged in this writ petition on the same grounds.
5. Subsequently, the petitioner has filed a supplemental affidavit alleging that the erstwhile firm of Tarapore and Company during the relevant years 1962-63 to 1965-66 paid various amounts towards the taxes due by the deceased, Loganathan, aggregating to Rs. 9,87,591.63 in addition to a sum of Rs. 1,58,790 paid as annuity deposit for the assessment years 1964-65 and 1965-66, and that the said two amounts would cover the entire tax liability in respect of the share income from the firm for those years, and that in any event the firm's liability under Section 182(4) is restricted to 30% of the share income of the deceased partner. On these facts, the petitioner has raised the following additional grounds.
(1) The firm having paid a sum of Rs. 9,87,591.63 towards the tax due from the late Loganathan in respect of his share income from the firm in addition to the sum of Rs. 1,58,790 paid as annuity deposit for the assessment years 1964-65 and 1965-66, the notice issued on the firm after its dissolution and served on the petitioner demanding a sum of Rs. 9,98,640 is wholly without jurisdiction.
(2) That the ITO has not established that the tax to the extent of 30% of the share income cannot be recovered from the estate of late Loganathan, and
(3) That the second respondent in his order having admitted that the estate of the deceased is worth about 20 lakhs of rupees, which is far in excess of the amount due under Section 182(4), the petitioner cannot be proceeded against for recovery of the amount due by the deceased partner for the relevant years.
6. In the supplemental affidavit the details of payments made by the firm towards the tax due by the deceased partner, C, S. Loganathan, towards his share income from the firm have been given as follows :
Assessment yearTaxes paid byTarapore & Co. for C. S. Loganathan
7. In the original counter-affidavit filed by the respondents it has been stated that the revision of the demand issued to the petitioner under Section 182(4) of the Act became necessary as a result of an arithmetical mistake in the calculation of 30% of the share income and that, therefore, a revised order dated March 30, 1976, was passed by the first respondent determining the income as Rs. 9,98,640. According to the respondents, the erstwhile firm was bound to retain 30% of the share income of the partner, and if the tax becomes irrecoverable from the partner, the firm is automatically liable to pay the amount and that it is the statutory duty of all the firms to retain the prescribed percentage of the share income of a partner till the tax liability in respect of that share income is satisfied. It is also the respondent's case that under the provisions of Section 189(3) of the Act and the Explanation thereto any demand issued under Section 182(4) can be enforced even after the dissolution of the firm by proceeding against the surviving partner or the continuing partner, as the case may be, that the total arrears payable by the deceased, Loganathan, as on November 30, 1977, was Rs. 50,64,880 and the value of the known assets left by him was only Rs. 20,00,000, and that as the assets left are not enough to meet the tax liabilities, the demand issued against the petitioner under Section 182(4) is tenable in law.
7. With reference to the facts set out in the supplemental affidavit, the respondents have filed a supplemental counter-affidavit wherein it has been stated that it is not possible to verify the correctness of the alleged payment of Rs. 9,87,591.63 though it is true that the petitioner has paid a sura of Rs. 1,58,790 towards annuity deposit as alleged by the petitioner. On a specific direction by the court to the respondents to verify whether the alleged payment of Rs. 9,87,591.63 by the firm is true, Mr. Ranga-swamy, counsel appearing for the revenue, has stated at the time of the arguments that on verification it was found that a sum of Rs. 9,87,591.63 has been paid. He has also filed the details of payments of tax with the dates of payment which has been credited to the tax account of Loganathan. Thus, it is clear that the firm has paid even during the lifetime of C. S. Loganathan for the relevant years a sum of Rs. 9,87,591.63.
8. According to the petitioner now that the payments made by the erstwhile firm towards the tax liability of the deceased partner has exceeded the 30% of the share income provided in Section 182(4), no further liability from the firm can arise. But according to the revenue all the payments made by the firm during the lifetime of Loganathan should be taken as payments by him, that those payments cannot be taken towards the discharge of the firm's liability under Section 182(4) and that all payments made before invoking the powers under Section 182(4) cannot be taken into account for determining the quantum payable by the firm under that section.
9. We are not in a position to accept the contention put forward on behalf of the revenue that the payments made by the firm for the relevant assessment years during the lifetime of the deceased, Loganathan, cannot bs taken into account while determining the tax liability of the firm under Section 182(4). Section 182(4) reads as follows :
' A registered firm may retain out of the share of each partner in the income of the firm a sum not exceeding thirty per cent. thereof until such time as the tax which may be levied on the partner in respect of that share is paid by him ; and where the tax so levied cannot be recovered from the partner, whether wholly or in part, the firm shall be liable to pay the tax, to the extent of the amount retained or could have been so retained.'
10. The above provision enables a registered firm to retain out of the share of each partner in the income of the firm a sum not exceeding 30 per cent. thereof until the partner has paid the tax in respect of his share of the firm's income and that if the partner commits default in paying the tax, the firm is liable to pay the tax to the extent of the amount which the firm is entitled to retain as stated above, irrespective of the question whether the firm had in fact retained any amount or not. This provision is more or less an exception to the general rule that the tax leviedon a partner of a registered firm cannot be recovered from the firm or from the other partners. In the case of a registered firm, its profits are apportioned between the partners and each partner's share of such profits is taxed in his hands. In this case, admittedly the firm has paid the various amounts amounting to Rs. 9,87,591.63 towards the tax due by the partner on his share of profits. Section 182(4), however, creates a direct liability on the firm to pay 30% of the share of profits of the partner if the tax which may be levied on the partner in respect of his share is not paid by him or where the tax so levied cannot be recovered from the partner either wholly or in part. The liability of the firm, therefore, cannot, in any event, exceed 30 per cent. of the share of profits of the partner. If the construction sought to be put forward on this provision by the revenue is to be accepted, then all the payments made by the firm towards the partner's liability during his lifetime will have to be excluded and the 30 per cent. prescribed in the section will have to be worked out on the balance of the tax due by the deceased partner. This will mean that the 30 per cent. referred to in the section becomes so indefinite that the firm may not be able to guess as to what is the 30 per cent. that it has to retain out of the share of profits at a particular time. The stand taken by the revenue that the liability of the firm is to pay 30 per cent. of the balance of the tax that is found due from the deceased partner at the time of invoking Section 182(4) will lead to an anomalous and unexpected position. Take a case where the firm has retained 30 per cent. of the share of profits and paid the same towards the tax payable by the partner in each of the relevant years and the partner has not paid the balance of the tax due -by him. If at that stage Section 182(4) is to be invoked the firm should pay 30% of the amount then determined in addition to the 30% of the share of profits paid earlier which, in our view, cannot be the intention or object behind Section 182(4). Therefore, the said provision cannot be understood as suggested by the revenue to introduce uncertainty. Here the firm is made liable to a maximum extent of 30% and the 30% cannot vary with reference to the time when the ITO chooses to invoke the power under Section 182(4). It is true, the section can be invoked by the ITO when the amount assessed on the partner cannot be recovered from him wholly or in part. But the maximum limit of 30% provided in the said section cannot be exceeded. Therefore, any interpretation which is likely to impose on the firm a liability exceeding 30% of the share of profits of the partner has to be avoided. Since the contention put forward on behalf of the revenue definitely raises the maximum quantum of liability of the firm under this section, that cannot be accepted. In Chulai Ram v. ITO : 94ITR463(All) , while construing Section 182(4), it was pointed out (p. 464) :
'Normally, tax due from a partner cannot be recovered from the firm. Every partner has to pay the tax assessed on him. Sub-section (4) of Section 182 makes a departure from that rule and makes the firm liable for the payment of tax due from a partner in respect of his share in the income of the firm. The liability of the firm is, however, limited to 30 per cent. of the defaulting partner's share in the profits of the firm. The firm is entitled to retain a sum not exceeding 30 per cent. of the share of each partner in order to meet this liability. In the instant case, the firm did not retain anything from the share of Shyam Bihari. That circumstance, however, does not absolve the firm from the liability cast upon it under Section 182(4). The provision enabling the firm to retain a part of the income of the partners is meant for its benefit but if it does not avail of the benefit, its liability under this provision is not affected. This position is not altered even if the firm is dissolved or its business is discontinued. '
11. Dealing with the question as to whether the liability of the firm under Section 182(4) could be enforced after the dissolution of the firm or its discontinuance of the business, the court held that as a result of Section 189(3), an assessment can be made against a dissolved firm as if no dissolution had taken place and every partner of the firm becomes jointly and severally liable for the tax assessed on the firm and that, therefore, on a reading of the provisions of Sections 182(4) and 189(3) together, the liability of the firm under Section 182(4) has to be treated as a joint and several liability of the partners even though the firm has been dissolved.
12. In this case, the 30% liability of the firm has beeen determined as Rs. 9,98,640 and the amount retained out of the profits and paid by the firm is Rs. 9,87,591.63. This leaves a balance of Rs. 11,058.37 payable by the firm under Section 182(4). The learned counsel for the petitioner would point out that the firm has paid annuity deposit on behalf of the deceased, C. S. Loganathan, for the years 1964-65 and 1965-66 amounting to Rs. 1,58,790 and this also should be given credit to towards the 30% referred to in Section 182(4). We do not see how the annuity deposit paid will amount to a discharge of the liability for payment of income-tax which alone is the subject-matter under Section 182(4). The amount of annuity deposit paid by the firm on behalf of the deceased partner will have to be treated only as an asset of the deceased partner and it is open to the department to adjust the same towards the balance of arrears of tax due by the deceased partner. Therefore, the impugned order of the first respondent as affirmed by the second respondent is quashed. It is, however, open to the first respondent to issue a fresh demand for a sum of Rs. 11,058.37 as against the erstwhile firm. The writ petition is allowed accordingly. There will be no order as to costs.